The Foreign Service Journal, December 2003

even larger contingent from the Russian side, headed by the eco- nomics and energy ministers. Evans and Abraham also met in Moscow with President Putin, who fully endorsed the policy process and the cooperation in major oil and gas projects it sup- ports. CEOs of major Russian oil companies and state enterprises in the sector were present, as were their American counter- parts. The American chairman of the newly formed company TNK-BP spoke, repre- senting a new $8 billion foreign investment in the Russian oil and gas patch. Speculation was rife, fueled by Russia-based investment bankers and Western financial press, that ExxonMobil or ChevronTexaco was about to make an even larger investment by taking a 25 percent or higher stake in YukosSibneft. The conference concluded with a ban- quet in a state dining room of one of Catherine the Great’s palaces, followed by a spectacular fireworks display. Russia seemed finally open for business and willing to play by international rules, at least in the petroleum sector. Enthusiasm for the future of bilat- eral cooperation could not have been higher. The picture seems quite different as of this writing at the end of October. The man who symbolizes the development of a new, progressive and international- ly-minded business class in Russia, Mikhail Khodorkovsky, the CEO of Yukos, is sitting in a Moscow prison. He was seized by security forces from his air- plane on Oct. 25 during a stop in Novosibirsk while on a business trip inside Russia. Charges have been filed that attack the validity of privatizations in the 1990s in spite of repeated assurances from President Putin himself, since early July when the Yukos controversy started, that the admittedly flawed privatization process will not be revisited. The Moscow stock market dropped by 10 percent on the first day of trading after Khodorkovsky’s arrest. The idea of a major investment by ExxonMobil or ChevronTexaco in Yukos shares, if it was ever realistic, now seems far-fetched. More important, the founda- tion of Russia’s recent natural resource boom — secure property rights under the rule of law, leading to reinvestment of Russian capital and the introduc- tion of Western managerial and technological meth- ods — seems to be in jeopardy. Net capital inflows, evident only beginning in 2003, have reversed and been replaced by the flight of domestic capital that was prevalent throughout the previous decade in Russia. Megaprojects such as a $7 billion export pipeline and terminal to Murmansk or an even more expensive Barents Sea natural gas exploration and liquefied nat- ural gas export project were actively discussed during the St. Petersburg commercial energy summit as con- crete steps in bilateral economic cooperation, but appear to be far from realization. The likelihood of a major infusion of international capital at a time when the Russian private sector’s independent management of oil and gas assets is questioned seems remote. Special commissions are also being formed to investi- gate the performance of Russian and Western compa- nies like ExxonMobil and Shell on existing petroleum licenses, just as major investment decisions are being made. The enthusiasm of autumn has been replaced by the cold wind of an early Russian winter. Will spring, F O C U S 32 F O R E I G N S E R V I C E J O U R N A L / D E C E M B E R 2 0 0 3 Edward Chow is a visiting scholar at the Carnegie Endowment for International Peace. An international business consultant who has worked in Asia, the Middle East, Africa, South America, Europe and the former Soviet Union, he specializes in investments in emerging economies and international oil and gas. Prior to establishing his own consulting practice, Mr. Chow spent 20 years with Chevron Corporation in the U.S. and overseas. He played a leading role in negoti- ating the international commercial agreement to build a $2.6 billion oil pipeline from Kazakhstan on the Caspian to the Russian Black Sea coast, and served as Chevron’s principal international representative in Washington. Between 1989 and 1991 he was based in Beijing as Chevron's country manager for China. No amount of success in promoting energy cooperation with Russia will fundamentally improve U.S. oil supply vulnerability.